This is my second post in the series on my first real estate development experience. Subscribe (right side bar) to make sure you don't miss a post. The first post was about finding the right land. BTW, finding the land is not the right first step, but it was mine. I am sure that there will be a bunch of other steps that I get in the wrong order.
One thing about this process is that I knew enough to know that I needed help, serious help. Given that I have been practicing for a few years it seemed reasonable that I would be able to handle the “architect” side of things. One part of the process that I didn't know was how to tell if a project was going to work financially. Luckily I was working with a wonderful chap who was willing to teach me a lot about putting together a Proforma. I was testing proformas in a back of the envelope fashion on a bunch to different properties as I was trying to decide what type of project would be right for my “first time” These proformas we were targeted toward large rental projects. This type of project is not exactly what I am hoping to do. Because of my goals (Social Proforma), I wanted to do a small project that has for sale units.
After learning a little about putting together a financial model I decided it was time to approach my first potential partner. As with a lot of early entrepreneurs I first looked at the people closest.
My brother, Adam, is a general contractor that has been rehabbing homes for a few years. We began to talk about doing a project together. He loved the idea of taking his business to the next level. And I was thrilled to have a partner with so much contracting experience. Also he had been putting together his own type of proforma to see if his flip houses would be profitable. We are great friends and have run many races together, so it felt like we would be able to deal with the stress of doing a project together.
The more we looked at different financial models, the more we decided that what we were attempting was rather similar to a flip house. The only difference is rather than remodel cost it is new construction cost. And instead of one sale at the end there were multiple. The equation is really simple Sales - Costs = Profits. If those profits are worth the risk of doing the project then away you go. We just needed to make sure we were comfortable with the anticipated sales price, and we needed to search for all of the potential hidden costs.
In order to get a sales price and a cost you need to have a design, so next month I will post some details about how the design came about.